Q4 2021 Occidental Petroleum Corp Earnings Call
Good afternoon, and welcome to Occidental's fourth-quarter 2021 earnings conference call.
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I would now like to turn the conference over to Jeff Alvarez, Vice President of Investor Relations. Please go ahead.
Thank you, Rocco.
Good afternoon, everyone and thank you for participating and Occidental's fourth-quarter 2021 conference call. On the call with us today are Vicki Hollub, President and Chief Executive Officer, Rob Peterson, Senior Vice President and Chief Financial Officer, Ken Dillon, President International oil and gas operations.
And Richard Jackson, President operations US onshore resources and carbon management.
This afternoon, we will refer to slides available on the investors section of our website. The presentation includes a cautionary statement on slide two regarding forward-looking statements that will be made on the call this afternoon.
I'll now turn the call over to Vicki. Vicki, please go ahead.
Thank you, Jeff and good afternoon, everyone.
Fourth quarter of 2021 was a fitting year.
A fitting way to end the year, where all these operational and financial performance in Dan's trend strong to stronger.
Our focus on consistently delivering outstanding operational results combined with our steadfast dedication and patience and improving our balance sheet.
Has positioned us to begin increasing the amount of capital returned to shareholders.
Our new shareholder return framework, which we will detail today includes the dividend that is sustainable in a low price environment.
We are pleased to implement this new framework beginning with an increase in the quarterly common dividend to 13 cents per share.
The position of strength that we are in today stems from our team's hard work and accomplishments last year throughout 2021, we strive tirelessly to improve our already exceptional operational performance.
We capitalized on efficiency improvements by embedding innovative techniques across our operations.
Our focus on learning implementing change where needed and maximizing opportunities for improvement enabled us to accelerate time to market for our products while generating notable capital savings.
We will continue to maximize operational efficiencies in 2022 by executing on our capital plan and invest in our highest return assets to generate long term sustainable free cash flow.
This afternoon, I will begin by covering our fourth quarter and full-year 2021 highlights and achievements before detailing our 2022 capital budget.
Robert will then discuss our shareholder return framework and Rob will provide guidance for the first quarter and year ahead before turning to Q&A at the end I will provide a preview of the low carbon ventures investor update we have planned for next month.
Now to talk about delivering cash flow priorities. Those who had followed us on this journey over the past several quarters now that our cash flow priorities have centered around derisking, our balance sheet and reducing debt.
We diligently delivered on these cash flow priorities throughout 2021, including the repayment of approximately $6.7 billion of debt.
We now expect that our net debt will be below 25 billion by the end of the first quarter of 2022, which will mark a change in how excess cash flow will be elegant allocated going forward.
Before I detail our updated cash flow priorities and shareholder return framework.
I'd like to first touch on a few of the many operational and financial successes that enabled us to reach this significant turning point.
2021 was a year of continuous operational improvements, which drove record free cash flow generation rapid debt reduction and a return to profitability.
One of OXY's core strength is our ability to develop assets in a way that efficiently maximizes production and recovery while generating significant cash flow and that is just what we did in 2021.
Drilling and completion records were set across our domestic and international businesses as our production for the year averaged 1.167 million Boe per day.
That's 27,000 Boe per day higher than our initial guidance.
2021 was also a more conventional year in terms of commodity prices operations and planning all of which was helpful. In providing a reserve update that reflects a more normalized price environment.
Our reserves for year end 2021 increased to $3.5 billion [BOE] representing a reserve replacement ratio of 241%.
Our reserves position means that we have a vast supply of low breakeven projects and inventory available.
We have included updated inventory information for our US onshore operations in the appendix to this presentation.
Over the last year, we significantly advanced our commitments toward a low carbon future.
We were proud to be one of only a few oil and gas companies with net-zero goal, they're aligned with the Paris Agreement's, 1.5 degrees Celsius pathway.
In December, OXY became the first US upstream oil and gas company to enter into a sustainability linked revolving credit facility, which includes absolute reductions in our combined scope, one and two CO2 equivalent emissions as the key performance indicators.
We said additional interim emission targets to further refined our zero pathway, including a short term target to reduce our CO2 equivalent emissions.
Approximately 3.7 million metric tons per year below our 2021 level and to accomplish that by 2024 .
We set a medium-term target to facilitate the geologic storage or use 25 million metric tons per year of CO2 in OXY value chain by 2032.
We also endorsed the methane guiding principles and oil and gas methane partnership 2.0.
Climate and clean Air Coalition initiative led by the United Nations Environment program.
This is consistent with our commitment to enhance methane emissions reporting and reducing those emissions.
Our journey towards net zero is underway and we look forward to discussing in greater detail at our low carbon ventures Investor Day next month.
Now the fourth quarter highlights.
The strong operational and financial performance, we delivered throughout last year continued in the fourth quarter. We set a fourth
We set a fourth well.
consecutive record for quarterly free cash flow generation before working capital, which contributed to generating our highest ever annual level of free cash flow in 2021.
We continue to apply free cash flow towards reducing debt and strengthening our balance sheet repaying an additional $2.2 billion of debt in the fourth quarter.
Operationally, all three business segments excelled in driving our robust financial performance.
Oxy Kim delivered record earnings for the second consecutive quarter as performance throughout the year culminated in 2021 being Oxy Kim's strongest in over 30 years.
The fourth quarter, which is typically lower due to seasonality even exceeded the record third quarter.
And in our oil and gas segment, our Permian Rockies in Oman teams set new operational records inefficiency benchmarks in the fourth quarter further improving on their third-quarter records.
Our midstream business outperformed by maximizing gas margins during the fourth quarter, all short term opportunities in the commodity markets are difficult to predict our mid states midstream team excels at finding and taking full advantage of such opportunities when they arise.
I'm pleased to say that our fourth-quarter results continued to demonstrate the commitment of all of our employees no matter their position or location to find ways to further create value by lowering costs, improving efficiencies and maximizing recoveries.
They truly are driving our strong financial results and providing a solid foundation for free cash flow generation.
Now onto 2021 oil and gas operational excellence.
On each of our last several calls, I've enjoyed highlighting the many operational achievements our teams continuously deliver.
The magnitude of these achievements is striking when viewed on a combined basis over the last year.
The magnitude of these achievements is striking when viewed on a combined basis over the last year.
We established record drilling cycle times in the Gulf of Mexico, the Permian, Rockies and in Oman.
And set new efficiency benchmarks across our portfolio in 2021.
We intend to maintain our focus on continuous improvement in the year ahead, as we work to maximize the value of our portfolio can generate for shareholders.
Now our 2022 capital plan.
Our 2022 capital plan and best in cash flow longevity, while building on the capital intensity leadership we demonstrated in 2021.
We have sized our capital plan to sustain production in 2022 at 1.155 million Boe per day, while investing in high return projects that will provide cash flow stability throughout the cycle.
We have also incorporated an expectation for inflation and a capital range to reflect the potential for fluctuations in our third party operated assets and our low carbon opportunities during the year.
Our sustaining capital, which we define as the capital required to sustain production at $40 WTI environment over a multiyear period remains industry-leading.
Our multi-year sustaining capital is expected to increase from our 2021 capital budget of $2.9 billion.
A reduced inventory of drilling uncompleted wells and additional investment in our Gulf of Mexico in EUR assets to optimize the long term productivity of our reservoirs and facilities.
If the macro environment requires spending below our multi-year sustaining capital, we have the ability to reduce it further and hold production flat for shorter periods of time as we've demonstrated.
We're also investing in attractive mid-cycle projects that will provide cashless stability through the cycle in future years. For example, these projects include the al Who's an expansion, which began last year and OxyChem is in the process of completing a feed study to modernize certain Gulf coast Chlor alkali assets from diaphragm to membrane technology.
We're also investing in attractive mid-cycle projects that will provide cashless stability through the cycle in future years. For example, these projects include the al Who's an expansion, which began last year and OxyChem is in the process of completing a feed study to modernize certain Gulf coast Chlor alkali assets from diaphragm to membrane technology.
Oh Gee.
Our capital plan also includes investments to advance our net zero pathway, including reducing emissions, improving energy efficiency and developing our carbon sequestration initiatives.
We're allocating capital in the budget to 1.5 to begin construction on the first direct air capture facility.
We continue to make progress on both the engineering and commercial needs for direct air capture development.
We are improving both of these aspects and believe Oxy's capital helps retain value for our shareholders.
As the construction phase and technology of this new project advance, we will continue to consider strategic capital partnerships instructors to address financing.
We will provide more comprehensive update on 1.5 indirect your capture at our March 23rd LCD Investor update.
We benefited greatly from commodity price rebound last year, and appreciate how especially the price environment can change.
The optionality that our scale and asset base provide enabled us to retain a high degree of flexibility in our capital spending plans.
The majority of our capital program is comprised of short cycle investments, meaning that we have the ability to quickly adapt to changes in the macro environment.
And then six months or less is necessary, we can reduce capital spending to sustaining levels.
And then six months or less is necessary, we can reduce capital spending to sustaining levels.
If oil prices remain supported this year, our intent is to follow our cash flow priorities and capital framework we will share with you today.
We have no need and no intent to invest in production growth this year.
Having a flexible capital budget that includes investment in cash flow longevity provides us and puts us in a strong position to implement shareholder return framework that will benefit shareholders over the long term.
With respect to cash flow priorities, our priorities for 2022 remain largely unchanged with a continuing emphasis on reducing debt while maintaining our asset base integrity and sustainability.
The objective of strengthening our financial position remains the same enabled us to confidently increase the amount of capital that we may sustainably returned to shareholders throughout the cycle.
We expect net debt to fall below 25 billion by the end of the first quarter. Our focus has expanded to returning capital to shareholders beginning with the increase in our common dividend to 13 cents per share and the reactivation and expansion of our share repurchase program.
The increase in the dividend of 13 cents per share is consistent with our intention to initially increase the dividend to a level that approximates yield of the S&P 500.
We believe establishing framework for returning capital to shareholders through a sustainable common dividend combined with an active share repurchase program and continued debt reduction creates an attractive value proposition for shareholders. While also improving the company's long term financial position.
So the first phase of our shareholder return framework initiated we have the option in future years to invest in cash flow growth.
The ability to grow oil and gas cash flow through higher production, but also have multiple investment opportunities across our other businesses.
As evidenced by our guidance for 2022, we do not intend to grow production in 2022 at the point, where it is appropriate to invest in future cash flow growth. We will only do so if supported by long term demand.
Any future production growth will be limited to an average annual rate of approximately 5%.
I'll now turn the call over to Rob who will walk you through our shareholder return framework.
Thank you, Vicky and good afternoon. As Vicki mentioned, the first phase of our shareholder return framework consists of continued debt reduction and increasing the common dividend of 13 cents per share and the reactivation and expansion of our share repurchase program.
With net debt expected to be below $25 billion by the end of the first quarter. We are ready to begin returning more capital to shareholders will continue to prioritize debt reduction with a focus on our medium-term goal of regaining our investment-grade credit rating.
We place high importance on debt reduction for the reasons I highlighted last quarter.
Mainly [that as Dennis] reduce our company's enterprise value will rebound back to the benefit of our shareholders.
We recognize that oil prices are uncertain and may remain volatile, particularly in the current environment.
We need to prioritize your time of initial $5 billion of debt and drive our net debt towards our next milestone of $20 billion.
When this milestone is achieved, our balance sheet will improve significantly even from where we are today.
We intend to provide our shareholders with a competitive common dividend while maintaining a long cycle of cash flow breakeven at $40 WPI or less.
Long term sustainable our dividend will be enhanced by continued deleveraging and share repurchases.
Towards our best in class capital efficiency and a deep low-cost portfolio of assets.
And then retire our cash interest payments will decrease freeing up cash that can be used to support future common dividend growth.
In addition to increasing the common dividend 13 cents per share, we intend to purchase approximately $3 billion about fitting shares of common stock maintaining an active share repurchase program with the benefit of our healthy balance sheet will potentially they want to grow the dividend on a per share basis.
At a faster rate.
As evidenced by our progress reducing debt last year, debt retirement means a higher capital priority to share repurchase program.
We intend to make substantial progress towards retiring an additional $5 billion of debt before initiating share repurchases.
It is our goal to reward shareholders with a triple benefit.
Of sustainable common dividend.
An active share repurchase program and are continuously strengthening financial position.
We believe the shareholder return framework we have detailed this afternoon delivers these benefits and random as transparent for shareholders.
I'll now turn to our fourth quarter results.
In the fourth quarter, we announced an adjusted profit of $1.48, and our reported profit of $1.37 per diluted share.
Our adjusted income improved significantly through 2021.
The fourth quarter being the strongest quarter of the year. The increase in earnings was primarily driven by higher commodity prices and volumes as well as the Arctic and excellent financial performance.
Our domestic oil and gas expenses experienced a sizeable production on a Boe basis from the previous quarter reflect a more normalized environment absent any significant weather disruptions.
The strong performance of our businesses combined with the benefit of healthy commodity prices enabled us to deliver another consecutive quarter of record free cash flow.
On our third quarter call, we announced the completion of our large scale divestiture program well reiterated our attention to continue seeking opportunities to optimize the portfolio to create shareholder value.
In November we completed a bolt-on acquisition to increase our working interest in your asset that we operate and in January 2022, we divested a small package of Permian acreage that had we had no immediate plans to develop. The purchase and sale prices of these transactions largely offset each other while the [EOR] acquisition added approximately 5000 Boe per day of low decline production as well.
The increase in our inventory of potential [CCUS] opportunities.
We exited the fourth quarter, approximately $2.8 billion of unrestricted cash on the balance sheet. After repaying approximately $2.2 billion of debt in the quarter. In total, last few repaid approximately $6.7 billion of debt retired upfront.
$150 million of notional interest rate swaps. Our debt reduction continues to drive a pronounced improvement in our credit profile. Since our last call both Fitch and S&P upgraded our credit rates are double B plus one notch below investment grade, while Moodys assigned us a positive outlook on our debt.
Reducing the amount of cash is committed to interest payments today places us in a stronger position for sustainable return of capital in the future.
We estimate that the balance sheet improvements executed in 2021 will reduce interest and financing costs by almost $250 million per year going forward, which will fund approximately half of the increase in our common dividend.
Our business incurred a negative working capital change in the fourth quarter.
Probably driven by higher accounts receivable balance due to higher commodity prices and to a lesser extent an increase in inventories, including a higher number of barrels on the water [at year end].
The oil and gas hedges we had in place rolled off at the end of the fourth quarter and we are now positioned to take full advantage of the current commodity price environment.
We recognize the possibility of a swift change in commodity prices always exists that mature maturity profile we have today is far more manageable than it was two years ago and our liquidity profile remains robust.
In addition to cash on hand, we have $4.4 billion of committed unutilized bank facilities.
We continue to believe that reducing debt and maintaining maximum flexibility in our capital plan is the most effective long term strategy solution to managing risk, while providing shareholders of the benefits of commodity price gain.
We expect our full-year production to average 1.155 million barrels per day in 2022.
Production in our first quarter of [2015] is expected to be lower than the fourth quarter of 2021 due to the timing impact of wells are brought online in 2021, severe winter weather in the Permian earlier this month and the impact of significant planned international turnaround activities this quarter.
Algeria, Al Hosn and [inaudible] are all undergoing scheduled maintenance in the first quarter, which is reflected in international production guidance.
Algeria, Al Hosn and [inaudible] are all undergoing scheduled maintenance in the first quarter, which is reflected in international production guidance.
Downtime associated with Al Hosn is notably larger than typical years at the plant is undergoing the first full shutdown since its inception to substantially complete the tie ins associated with expansion projects and to enhance plants to build sustainability and reliability.
Additionally, a portion of our international production is subject to production sharing contracts, we typically receive fewer barrels in a higher price environment. The impact of which is captured in our full-year and first-quarter guidance.
The Permian activity we added late in the fourth quarter is expected to replace the production benefit received in 2021, completing our DJ basin, our inventory of DJ basin of drilled uncompleted wells in the early part of last year.
Our 2022 Permian capital allocation expected everybody benefits that will last into 2023.
We anticipate that our activity this year will provide us the flexibility to either a whole Permian production flat at our 2022 exit rate for similar capital next year or spend less capital in 2023, the whole production relatively flat to our two average.
We also expect that our production in 2022 will increase throughout the year to achieve our full-year guidance as our international operations resumed normal production levels productivity in our Permian brings new production online.
Additionally, the trajectory of operating production is anticipated to offset lower production in the Rockies this year as our activity as the DJ basin is papered reflected development planning timing to ensure efficient operations at new furniture obtain. Partially offsetting lowers Rockies production with higher Permian production combined with an increase in activity will result.
In a slightly higher domestic operating expense at the DJ Basin has one of the lowest operating cost on a Boe basis in our portfolio.
The increase in Permian production is expected to result in domestic cash margins, improving but in 2022 as a companywide oil cut increases approximately 54.5%.
Mid-cycle level of capital, we intend to spend this year provides flexibility sustained production in 2023 and beyond at our multi-year sustaining capital level, $3.2 billion and a $40 price environment.
We expect that Oxy's 2022 earnings will exceed even 2021.
Oxy continues to benefit from continued demand improvement in caustic soda PVC pricing remained strong. Additionally, as I mentioned on our last call. We expect foreign market to remain tight as [inaudible] producers seek the highest value for their products.
OxyChem's integrates across multiple chlorine derivatives enables us to optimize our production mix to supply the products to market requires whether this is for Colin for water treatment vinyls or PVC for example.
This year, we will make an incremental capital investment as we can be a feed study for the modernization of certain Gulf coast Chlor alkali assets from diaphragm to membrane technology.
Modernizing these assets will result in a material energy efficiency improvement, which would also lower the carbon intensity per tonne.
Produced and delivered.
The project would also provide the opportunity for a significant expansion of our existing capacity to meet growing demand for our key products.
We expect to reach final investment decision later this year at which time, we will be prepared to share additional details.
To assist investors to reconcile our guidance with our segment earnings we made a change in how we guide midstream going forward. Our midstream guidance now includes income from West which is a change to how we've guided midstream previously.
Quarterly guidance now includes Oxy's portion of West income using the average of the previous four publicly available quarters. Our annual guidance now includes oxy as portion of western come into some of the previous four publicly available quarters.
As we look at the year ahead, we will work to continue improving on the numerous operational and financial success of 2021, including making additional inroads on reducing debt limiting their shareholder return framework advancing our low carbon aspiration. I will now turn the call back over to Vicki.
Thank you, Rob.
When we established low carbon ventures in 2018, we knew we were ahead of the curve and recognizing the opportunity and necessity of building a carbon management business, both to help reduce global emissions and to enhance our business at that time, we were focused on key technologies and projects that would reduce our emissions and provide them.
Our sustainable future business.
Today, we have a dance that vision and fully appreciate the vast scope of the carbon management opportunity as well as the cross-industry support and partnership in front of us.
On past earnings calls, we have discussed several of the initiatives low carbon ventures is developing an oxygen ambition to achieve net zero before 2050.
We've been working on key technology developments and important commercial needs to advance [LCVs] based projects that are now in a position to move more fully.
More fully detail, our low carbon business and how it positions us to realize a net zero ambition and improve our long term business.
On March 23rd we will host a low carbon ventures investor update where we will provide a detailed update on our low carbon strategy with a focus on the technology and commercial development of carbon capture projects, specifically direct air capture event, which we expect may last up to two and a half hours will be accessible through our website.
As I've said before we are excited about our unique position and capabilities as a company. We value our broader low carbon and business partnerships that are growing and our workforce is energized to advance this is immense opportunity before us.
We will now open the call for your questions.
Thank you. We will now begin the question and answer session.
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Today's first question comes from Jeanine Wai with Barclays. Please go ahead.
Hi. Good morning, good afternoon, everyone. Thanks for taking our questions.
Thank you.
Good morning.
Uh huh.
Our first question is on the gross debt reduction. We're assuming that the 5 million that you are
planning on getting through that can be executed through tenders. And so just any idea on what the timing of that could look like for you to complete that given what you've seen in the market?
And do you need to get through the full $5 billion of tenders before you begin the buybacks that we were looking back at your prior tender? And you almost got the whole thing done but that was only about 1.5 billion.
And do you need to get through the full $5 billion of tenders before you begin the buybacks that we were looking back at your prior tender? And you almost got the whole thing done but that was only about 1.5 billion.
Yes, good question Janine. And so I guess first let me comment on the tender that we did at the Endo in December. We were pretty aggressive on the premiums we put in that tender because we knew we had an additional $700 million of callable debt available to us at the time and so we were pretty happy with the ultimate outcome that came out of that.
As we moved forward since then.
We have a lot of opportunities to reduce the debt. You know last year, we were able to reduce up to $6.7 billion of debt we did last year, we only paid on 1.5% premium for that and within that $4.7 of that was actually concentrated in the maturities that were 2020 for newer and so when I look at the opportunities to retire debt this year.
As we indicated we already retired the remaining last of our 2022 maturities for $101 million already this month or this quarter.
Last time, our 2020 two maturities for $101 million already this month or this quarter.
So we do have tenders make whole provisions.
We have the ability to build cash on a net debt basis as maturities come forward, we do have the option to settle.
The February 23 notes, which is the bulk of our 2023 maturities come callable in November but overall when I look at our debt, it was actually even cheaper than it was at the end of the year largely because as interest rates have risen in the perspective of interest rates rising again.
So certainly the next dollar we put forward it'll be towards debt reduction.
And.
With the cash we ended the year at and the cash were adding during the quarter, it's pretty safe to say, that's probably not too far in the future that we initiate that process again.
We don't need to have all that completed before you return to buying shares, we initiate the share repurchase program, but we needed to be substantially completed or have line of sight on it being completed we will begin purchasing shares.
Initiate the share repurchase program, but we needed to be substantially completed or have line of sight on it being completed we will begin purchasing shares.
Okay. Great. That's really helpful information. Thank you, maybe just going forward a little bit beyond that on your future cash flow priorities. Oxy has got a real high-class problem I'm, assuming oil prices stay anywhere close to where they are today, you'll be building a significant amount of cash on the balance sheet over the next two years, even after you do the $5 billion of debt reduction.
You do that $5 billion.
And $3 billion of buybacks.
So I guess have you started to assess the next steps and capital allocation after hitting your debt goals and the buyback?
And I guess, specifically do you have any thoughts on potentially trying to tackle the preferreds early on and doing that versus either.
And just how you're thinking about the preferreds. Thank you.
We have discussed previously provisions with regards to the Berkshire agreement related to shareholder return, enabling us to begin redemption of the Berkshire to $4 per share common.
Dividend to our shareholders.
Assuming we repurchased $3 billion of shares in the 12 month period, and then you combine that with 52 dividend payments. So we're working second quarters.
We still want a distributed enough to reach of $4 per share distribution trigger.
We'd be about $3.72 at that point.
But I want to say that the Berkshire carbon provision isn't a limit on our ability to return value to shareholders. It simply means and circumstance arrives in the macro puts us in a place where we have exceeded $4 per share on a trailing 12 basis. We would just be in a position where we have to redeem an equal portion of Berkshire at a 10% premium as we return to shareholders above and beyond.
And so as we sit here today in February.
There's a lot of potential for elevated oil prices over an extended period of time no great constructive macro for going beyond our debt focus, but it's a little too early I think to speculate on what we would do at that point in time.
Thank you. Our next question today comes from Phil Gresh at JPMorgan. Please go ahead.
Yes, good afternoon.
I guess just to follow up on that question around the net debt the $20 billion next step so to speak.
What is the ultimate goal now with the balance sheet?
Now with the balance sheet is it.
Is it 10 to 15 billion? I mean, how do you think about that today?
Yeah. So I think over we have already seen a notes published from
The various rating agencies that their expectations would be.
Best My greatest somewhere in the mid to high teens, and so I think getting to that point it getting to a level at some point that is in that $15 million or less net debt is at an ultimate goal for the company that would put us in a place there. It also depends sort of on their long term price horizon, if you take the $60.
Getting down to a net of 20 puts us close to a two multiple at that point, depending on EBITDA going on a year in year out basis.
So we know we've got to do a little further than that in order to get consideration for investment grade.
Okay that makes sense. Thanks.
And then Rob you made a comment just about the Permian exit rate in 'twenty, two and in the mid 2023 and I was just wondering.
Where do you stand in terms of the Capex carry with the Echo patrol J B.
Is there any spending in 'twenty to 'twenty two.
Moved into the full 50 50 split or is that a 2023 is that I'm. Just curious based on your comments you are making how you incorporated how's that could flip to the 50 50 and win.
Based on activity level, we have planned for this year, we would probably consume the balance of the carry this year, but we don't anticipate.
Flipping in 2022.
Thank you and our next question today comes from Doug Leggate with Bank of America. Please go ahead.
Oh, Thanks, Good morning, everyone Wallboard, Vicki I wonder if I could follow up first on the buyback just so as I understand it correctly.
So $3 billion.
Is that Tom is that an annual number.
Depending on when you start the buyback would you still expect to execute the food 3 billion.
In 2022 irrespective of when you hit you get a line of sight, which I'm guessing.
Lots of months and I guess related.
If you're a tenant from running yourself a little bit.
One could argue taken advantage the spoke is heavily discounted because your capital structure why not consider something like an ASR.
So Doug I think the first way of answer part of your question is.
The.
Once we begin initiate the share repurchases it will be done both in a open market repurchase basis, when the market's open and when it's close to <unk> five type programmatic program.
The stock as you know is extremely liquid.
We can easily purchase.
You know a $1 billion of shares in less than 14 trading days without I mean close to 15% of the average daily trading volume and so theres pretty safe way that we're fairly short period of time, if we wanted to we could accomplish $3 billion goal.
But that goal certainly be dictated by our free cash flow generation this largely related to commodity prices.
We're in a environment right now where the hedges have rolled off were giving our shareholders full exposure to commodity prices, which we think over the cycle of the commodities will deliver the most value of the company and ultimately the most value for shareholders, but along with that we realized that the macro can change for a lot of different risk factors that can cause.
Prices to go Unconstructive for us in a rapid fashion also so we can't find ourselves in a in a position where maybe we've tackled the stock ahead of time, and then prices the price environment change for whatever reason and we haven't addressed the debt first and that's part of reason why we understand that over the long run over the course of the year, we made up.
Paying more for the stock to retire it but and aligning risks and opportunities.
Opportunities for shareholders, we think that the approach we're taking is the most prudent way to do it.
Yeah.
Okay.
So just to be clear. So if you started the buyback in me you'd still expect to get $3 billion done this year.
Just for clarity.
My follow up [laughter].
The timelines could be dependent upon the availability of cash so that's what's going to be the driver of it.
But in terms of.
<unk> ability to execute with the with the liquidity of the stock.
Timeframe, we'll be able to complete it in the second half of the year, even if we didn't initiate the second half of the year would not be a challenge.
Okay. Thank you my follow up is a resource question.
Vicki.
Guessing this was deliberate but you've given you've kind of laid out inventory depth for the onshore portfolio. It looks at the current rate something around 15 years, assuming not a lot of growth.
What about the Gulf of Mexico, and the rest of the portfolio can you give us a kind of an update as how do you see the resource depth or sustainability.
It goes along with the sustaining capital number that you gave us.
Yeah, all of all I can't answer that he's got his team actually working on that in view of some of the challenges we've had with the recent lease sale actually we have a great new story on that.
Hernan Doug.
In terms of Gulf of Mexico, We recently completed our field architecture studies as you know we have a 179 blocks or a nine two of those are tagged as exploration.
When we look at the risk portfolio and the opportunities. We have we have substantial work the hundreds of millions of risk barrels of opportunities going forward. We have a solid assembly line of projects. We've got three projects in flight that moment Caesar Tonga expansion the Horn mountain expansion.
Two subsea pumping.
You know there are recent as Vicki alluded to our recent.
At least run attempt or goal there was to.
Brian obtain acreage close by our existing infrastructure.
They accelerate simple tie backs, but that doesn't in hepatitis b of a large portfolio and we feel comfortable going forward.
Within the plans that have been presented in the slides.
Thank you. Our next question today comes from Neil Mehta with Goldman Sachs. Please go ahead.
Okay. Thanks, guys. So the first question is on the production profile. Vicki you had made the comment that if you think about the long term.
You want to see growth somewhere between zero and 5%. It is is that sort of why is.
How do you think about the long term profile and based on the way you've used you view normal that's a big range.
Where do you see yourselves planning.
In the context of that range.
Yeah.
Well it really depends on the projects and what we always do is we try to design our capital programs to do to deliver the best returns and so it's always as we develop our areas, it's always with that in mind and to build the facilities that require.
A a pace of development that delivers the maximum returns. So we could have lumpy a little bit lumpy growth going out Gulf of Mexico is a little bit lumpy and the shell play depending on when you're starting a new area or not it would be a little bit lumpy.
That's certainly our capital intensity, we believe is going to continue over time to be the.
The best in the industry and are they the development that we will have and whether or not we're at zero or 5% will depend on how the program lays out to maximize returns. So we have you know as you see inventory onshore inventory in the Gulf of Mexico.
Have they as well some international projects that could that could add value and as I mentioned in my script, we do have in our chemicals business opportunities to grow there and so the efficiencies and opportunities that we see really will depend on how they can play they sit together to deliver the best possible.
Yeah, Yeah, certainly an evolving situation, let me ask you about chemicals, they keep because the 'twenty two guide.
Guide.
With stronger than what we anticipate I think with a lot of investors expected chemicals to be sequentially lower just.
Just talk about some of the moving pieces there.
It allows for some profitability to improve year over year and what are the biggest risks to actually achieve in the guide.
Yeah.
Yeah.
I'll take the one on chemicals and so.
What I'd point, you to parse out how you understand the business as well as obviously we.
If you look at slide 39 in the deck. The two business profit drivers in the business or the PVC business or the vinyls business in the caustic soda business and both of those did materially improve throughout 2021.
And when we have favorable conditions in both.
The impact to earnings is pretty significant and so what youre seeing is US is first let me just say that where the market is at right. Now is the PVC business is still quite tight.
Tight supply demand balance I think operating rates for the industry were an 81% in January .
Demand was slightly higher than January of 'twenty, two relative to January 21, less than 1%, but a little bit better producers are attempting to build inventory in PBC right now in advance of outages are scheduled.
But you've got the situation, where they already had low inventories and the pull from the construction sector remains strong and so you've got attempts to grow inventories while demand is still quite strong we expect demand to remain strong in the PVC business. Throughout 2022. There is a very favorable housing starts outlook mortgage rates, obviously, you remain pretty low in our modeling.
Sector also remains very attractive and so you can look at the export side of the business. So in January there's only about 250 million pounds of export which is about 30% less in 'twenty, one and that's reflective of the lack of product available right now and so we certainly see.
You're not give an opportunity for inventory to really replenish itself and exports to even return until probably the latter part of the second quarter when resin supply it might be normalized in the wake of outages, assuming theres no unplanned outages in that period.
In the case of the crops side, we're seeing very tight tight supply demand market largely because of production challenges operating rates. We think of the industry are going to be somewhere in the low <unk> for the first quarter. There's a lot of planned outages scheduled now and may of 'twenty two.
There's been a significant number of unplanned outages is still in the industry.
Packing product availability in the working on the corn side, we think growth will see growth of at least 3% to 4%. This year again, all the sector markets are strong with the similar markets. The PBC the draw on the Chlor alkali side of the business and we think that'll be also supplemented by this improving travel and then business spending returned to office will drive both.
Paper usage for caustic soda et cetera. So a lot of things that we think are going to be positive on that and other international side of the caustic business, certainly rising natural gas prices and availability in Europe and Asia.
But already impacted operating rates of core vinyl producers overseas, which is driving up values of that.
So the biggest change year over year, and why I think it was maybe a surprise because.
Conditions were still remarkable in 2021, and why would we give guidance I'll get higher than that is that if you go back and look at the beginning of the year caustic soda at the beginning of 'twenty 'twenty was still coming out of really low values at the post COVID-19 drop in 2020.
PBC recovered very quickly on the construction side, but caustic was dragging its way up little by little out of out of the lows experienced during 2020, and so caustic prices improved sequentially quarter after quarter throughout 2021, which is why you'll see the earnings for this segment in the fourth quarter, which typically you know the first and fourth a shoulder quarter.
Orders in the strong ones are the mid mid year.
Q2, Q3, but you had almost double the earnings in the chemical segment in the fourth quarter compared to the first quarter and so we're coming in with so much more momentum, which is why our guide for Q1 is so strong for the chemical business and so it's not that we're predicting those condition to persist all the way through the entire year, we're just going to start from a higher point and how long that that cause it.
As conditions persist, we will impact what does that guidance actually could increase the balance of the year potentially if it holds on longer that we're anticipating we do anticipate that things as I said, we will start to normalize maybe the middle part of the year.
Thank you and our next question today comes from Matt Portillo with two P. H. Please go ahead.
Yeah.
Good morning, all.
Our first question on the D. J Basin, you mentioned in the prepared remarks, some timing around permits just curious if you could provide some context on the permitting process and stands today and is this a good level of development to think about for next year or should we expect a rebound in the DJ in 2023 as it relates to drilling.
Hi, Matt. This is this is Richard I'll take that one four so.
With respect to permits in the D J.
You know really have had good progress over the last year or so I would describe it just looking at some of the.
The permits in hand.
We've had about 46 wells permitted which takes us through really past half of the year and so what we've really put in place is optionality in our program so dig into sort of our onshore plan for this year.
We have plans to pick up a second rig in the year and really that's based on confidence with where we're going with with our permit so.
As you know last year.
Some changes in terms of the process happened and so we've been meaningfully engaged over the last year importantly, yet.
Stakeholder livable communities and then now with the state, but we have seen in our own.
Pads approved as well as other operators and I think you know that.
Back that we've received and we continue to work on together.
Continuing to improve technology and things that we know they can really places us in a good place for development. So I guess in short we're optimistic we've got a rig pointing to come in in the second half of the year, but but but have optionality within the program to be able to adjust as needed.
Perfect and maybe a follow up on the marketing side as you know as an organization you guys have been very thoughtful about this process through the cycle. The basin. It looks like there's possibly some solutions on the horizon for incremental gas takeaway and just curious how you all might be thinking about.
Potentially adding to your takeaway portfolio from a gas marketing perspective, and then maybe dovetailing into that on the crude oil side can you just remind us when some of those contracts.
Start to rollover and if there's any tailwind to the financials kind of moving forward over the next few years around crude oil marketing.
Yeah, Matt, we really have enough gas capacity and as much as we feel like we need at this point and with respect to our growth profile.
And then for the oil side of it the contracts start rolling off in 2025 for the oil and gas for the oil part of the contracts.
So we have plenty of capacity at that time, I think it'll take probably a couple of years to get us down to the point, where we're all the contracts roll off.
Thank you. Our next question today comes from Neal Dingmann of Truth Securities. Please go ahead.
Good morning.
Thank you.
My first question maybe for you you mentioned just a.
A couple of minutes ago here.
You thought maybe it would ramp in chemicals and you know.
Obviously as a finance guy.
It just seems continues to be I know when I saw him in December and it just continues to get better and better I guess my question is if I didn't feel guy how much can you grow that and would that grow in conjunction with their low carbon solution business I know you've talked about that in the past I'm just wondering how much could you pushed that business given it just continues to get them off the park on that one.
And I think we'll talk about that a little bit more as we talk about the project and the capital that we're executing to convert our diaphragm to membranes.
Because that's going to improve some efficiency in the areas, where we're doing that conversion.
We will actually increase be able to increase our capacity and we'll outline that in detail that a little more of that in the next earnings call.
Because right now we're currently in the process of doing they are the feed study on that.
Or today.
With respect to other opportunities, we will continue to to consider incoming calls about potential partnerships, where it makes sense to do projects with customers or or from the perspective of supporting low carbon ventures, we try to be opportunistic in chemicals.
And not build without a certainly the demand for the product and so.
On the low carbon ventures side, where as we go through this finding opportunities where there are synergies and growing synergies between the chemicals business in the low carbon business.
So it will have some growth around that.
No that's great to hear and then just a second you talked just a minute ago also about the DJ and my thought is.
Is it sounds like some of the curb or some of the Permian production as you replace the way this year is that right.
And does that is going to be the case going forward and is that because you know you're talking about I know Richard permits and all and shape I'm just wondering what what's sort of the reason the rationale for why not why not just grow in both of these I mean I'm looking at that.
Yeah. It does.
It really just depends on the permitting process because we do have really good inventory in the D. J basin as well and as we go forward and we broke out the process. If we get ahead on the permitting we would we would consider adding a rig or.
Or a rig or two to the DJ as well.
Our next question today comes from Dave Dunkel bomb Colin Please go ahead.
Okay.
Thanks for all the details today, Vicki and team and congrats on the visibility of $20 billion of debt.
I wanted to ask just on the sustaining capital.
There there are lots of ins and outs, particularly around the Gulf of Mexico, and EUR catch up some normalization of Rocky stocks I guess why.
When we think about that delta between the two eight or two nine that you guys had talked about last year.
$400 million increment this year.
How do we think about that sustaining capital level progressing into the out years now.
Does it have some upwards pressure on it because of catch ups or should we look at this as a catch up here and that should moderate and potentially decline along with base declines moderating.
Yeah.
Okay.
But maybe it will.
Start with onshore and speak to that a little bit I think I think you've got it right I think if you look over the last couple of years and what's happened.
Certainly 'twenty 'twenty had a significant reset for us in terms of activity levels and so you know preserving cash.
And at that point, and really dropped activity levels, almost completely and so coming on the back back half and into 2021, we had things like.
The ducks in the in the DJ that allowed us that ability to add production and maximize cash flow for 2021 with.
With a lot less capital investment and so what happened last year was really as we think about the transition. It went from transitioning from docs as we restored activity really to drilling and completion, which is a much more steady state pipeline for our production delivery and so the way that played out was really at the end.
The fourth quarter beginning of the first quarter, we were able to pick up our drilling and frac cores to sustain the production for for this year, which did a couple of things one it was good because.
We head into inflationary period, we were able to gain activity and create that stability within our capital program.
But what it does is it it did create a bit of a lump that we have most of our wells online really starting late in the first quarter and then you hit more steady state in.
In the second and third quarter and so is that projects are.
Into the end of the year and into 2023, you can tell from our first quarter guidance to total year that we do have an increase of production but.
Those type of events as well as restoring activity really from a cash investment perspective, and you are adding low decline production barrels really gives us a much more sustainable production level across the cycle and so you know I think I think we're restoring as you said a much more nor.
<unk> steady state activity level in a much more robust or sustainable free cash flow capability.
So I think considering the rest of the portfolio, we don't see a lot of upward pressure for the 3.2 as a whole.
And David just to add to your point I mean, I'm talking about Richard Vicki just went through I mean from a decline standpoint as you know we improved the base decline from 25% two years ago to 22 last year and it's the same this year, it's at 22% as well given the things Richard said, I guess potential to flatten that out a bit in the future.
Sure.
I appreciate all the color on that and if I could just ask a quick follow up just so I'm understanding there is $400 million I think that was attributed to the difference to the low end versus the high end of capital Guide.
What do you think you're talking about low carbon ventures spends that would be potential in OBO.
I guess it for that low carbon ventures spends would that just be accelerating some projects or is it the contingency for things that you're considering doing but arent sure. If he wants to pursue at this point I guess.
How do we think about that that's sort of allowance that's built into the difference in the low and the high end.
Yes. This is Richard again, Yeah, I think you've got it right from a standpoint of really the LCB capitals, certainly focus a meaningfully on our direct air capture 0.1, and so there is a project timeline associated with that were.
Engineering is going great commercial aspects of the project continue to be supportive and so.
There's a little bit of uncertainty there, but that component.
Well, we'll have more visibility and be able to talk more about even with you next month. In addition to that what's happened is really beyond strong engineering progress. We continue to have good commercial.
Support whether that's a global policy.
Recognition for carbon capture or even director capture in particular or even.
With strategic.
Net zero businesses and so these these things support.
<unk> and so what's happened is we do see additional opportunities for director capture for example, where we had an opportunity in Canada look at with a developer direct air capture with with air to fuels and so a bit of that money is as these projects become more opportunistic we would allocate.
Some feasibility capital to be able to look at these other other type projects. The final piece is really our six U S and you've probably seen some pieces around projects that we're involved with and so those.
Those continue moving beyond.
Into into commercial development and so we have some capital associated to continue those but again be able to share more in march around that but.
Look forward to these projects advancing meaningfully this year.
Thank you and ladies and gentlemen, our final question today comes from Rafael de La <unk> with Societe Generale. Please go ahead.
Hello, Thank you very much for taking my questions. The first one is related to your <unk> business.
Could you maybe tell us a bit more.
Shouldn't this division has trended since you stopped reporting needs.
Singular entity.
And also I was wondering is the extra capex you will throw in whose business is solely to stop decline or whether you intend to restart growing his business as well.
Maybe I'll start with the EUR, just a little bit.
As we think about the last couple of years I'd say the opportunity in front of us really to address you know.
Any decline that we've seen is really.
And as it comes to our Opex when we talk about that that's really restoration of maintenance and specifically downhole maintenance and so the ability to allocate.
Some of that cash investment to restore down production and some of the best cash investment we have its very high return.
Even at mid cycle prices and so we expect to be able to and have added some well service rigs to add up to 6000 barrels a day by year end or not really.
Stores, the normal backlog in maintenance schedule that we had.
Really going back to 2019, so that that's the most meaningful change in terms of the EUR business that we're approaching this year.
Excellent. Thank you very much and my follow up would be are actually on Algeria.
I see that you were going to have some activity. There in 2022 I was wondering if you could tell us a bit more what you have in store for us either.
So for this part of the world knowing that we in Europe are going to need much more gas from all the suppliers and it will be great to shoot some some projects some gas projects in Nigeria for instance.
Hi, it's Ken here.
First of all I'd say the operations team had a great year last year and achieved the 50000 barrel a day milestone.
On the contract side, we spent the time optimizing the future development plans that you're sort of alluding to and we worked through the legal framework around the new hydrocarbon love, which is designed to encourage foreign investment in the country.
This year, we will drill four wells there'll be two injectors to producers and we've now started negotiations with sonatrach and when the early stages. There's a large American company with state of the art shale capabilities. We think we have a lot to offer the country going forward and hopefully that helps in Europe also.
We'll keep you updated on our progress at the next call.
Thank you ladies and gentlemen, this concludes our question and answer session.
I'll turn the conference back over to Vicki Holt for any closing remarks.
Before we go I'd like to say that we stand and firm condemnation of the insane and then humane actions taken by certain in Russia to invade Ukraine, I thought and prayers go out to all the people of Ukraine.
Thank you all for your questions and for joining our call today.
Thank you Ma'am. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.